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Despite criticism that it’s a theoretical, illiquid and convoluted system, the cap-and-trade carbon-trading market is maturing, generating real dollars, spurring new business models and getting a look from federal regulators.
New England has been at the forefront of the movement, and while the system for trading in representations of reduced pollution and renewable energy remains complex, most experts agree that it is not going away. As a result, local companies and officials that have been working in the market for years are starting to see the return on their investment — in the form of funds for clean energy programs, revenue to new entrepreneurial efforts and attention to what could serve as a national model for more cap-and-trade initiatives.
Boiled down, the carbon cap-and-trade market breaks into two categories: mandatory and voluntary. The mandatory system is driven by regional or federal legislation that sets goals for pollution reduction, and holds companies accountable for reaching those goals. Voluntary carbon trading vehicles include renewable energy certificates (RECs) and carbon credits, which can be purchased and traded by organizations interested in fostering good will or looking to improve their environmental footprint.
The Northeast is home to the nation’s first mandatory regional cap-and-trade system, called the Regional Greenhouse Gas Initiative (RGGI), which deals in carbon offsets, or units that represent greenhouse gas emission reduction by a company. Companies that fall under RGGI regulations are mandated to gradually reduce their greenhouse gas output over time, and companies that exceed that goal by reducing even more are granted offsets. Companies that fail to reach the goal must buy those offsets, or submit to fines.
RGGI now holds carbon-offset auctions on a quarterly basis and has run three since September. Including the most recent one, held last month, the auctions have raised a total of $44.5 million in Massachusetts alone. All of that revenue is turned back into clean energy programs, according to Rachel Evans, the deputy general counsel for the Massachusetts Department of Energy Resources. Some examples of programs that have been funded through the auctions include the Governor’s Green Communities Program and a heating system replacement program for low-income housing through the state’s Department of Housing and Community Development.
In Connecticut, Gov. M. Jodi Rell this week allocated $14 million of the proceeds her state gained through carbon auctions to organizations working to promote and advance clean energy projects.
The success of RGGI is also being touted as at least a partial template for a national cap-and-trade system, a topic that is the subject of a recent bill filed by U.S. Reps. Edward Markey of Massachusetts and Henry Waxman, which is expected to go into subcommittee hearings later this month.
At a recent clean energy event at MIT, Markey said RGGI is proof that an auction system can work and that it could be a working template for a national system.
Carbon entrepreneurship
The cap-and-trade system is also providing a stream of business for local entrepreneurs.
World Energy Solutions Inc., which traditionally traded in natural gas and power, launched an environmentally friendly version of its auction business in 2007 called the World Green Exchange, which provides the electronic platform for the RGGI auctions, as well as many other carbon-trading institutions. Bolstered by the activity, World Energy Solutions posted a 35 percent revenue gain in 2008 and recently launched an online “shopping mall” to help its customers get a better insight into the commodities.
“This product is viable because the industry is coming together and turning into a viable market,” said Phil Adams, president and COO of World Energy.
But while cap and trade is gaining momentum, particularly on the political front as the Obama administration has thrown support its way, the alternative — a carbon tax — has not completely gone away. For some, the complexity of a cap-and-trade system shifts focus away from the basic purpose of any energy policy — to reduce the collective carbon footprint while generating funding for projects that further that goal.
Mitch Tyson, a co-founder of the New England Clean Energy Council and CEO of Wilmington-based Advanced Electron Beams Inc., said that while he is not against the idea of cap and trade, a carbon tax may make more sense if it limits complexity.
“The people we sell to, for example, need to be able to figure out the effective cost savings of a clean energy program, and cap and trade is too complex right now to do that,” he said.
In the end, however, what matters is that a policy is put it in place.
“What’s most important (in this debate) is that we act,” Tyson said.
On the block
Several regional efforts have occurred recently, including:
• The Regional Greenhouse Gas Initiative (RGGI), which deals in carbon offsets for companies in participating Northeast states, has executed three auctions since its first in September of last year, raising a total of $44.5 million in Massachusetts alone that is turned directly back into local green energy projects.
• Worcester-based World Energy Solutions Inc., which provided the electronic platform for the RGGI auctions, as well as a numerous other carbon trading events through its World Green Exchange, posted a 35 percent revenue gain in 2008, and its stock jumped 50 percent in early April after a 1 to 10 stock consolidation.
• Connecticut Gov. M. Jodi Rell this week allocated $14 million of the proceeds her state gained through carbon auctions to nonprofit organizations working to promote and advance clean energy projects.
Carbon trading terms to know
Cap and Trade: A system of trading by which a cap for pollution by a given company or facility is established and reduced over time. Companies that reduce their emissions faster than the cap can trade their extra reductions to companies that have reduced their emissions more slowly.
Carbon Credit Registries: Organizations with electronic accounting systems that keep track of emission allowances or carbon credits of companies participating in the carbon market.
Carbon Offsets: A trading vehicle that represents the reduction of a specific quantity of greenhouse gases and regarded as a real environmental commodity, not a donation or investment in a future project.
Clean Development Mechanisms (CDM): A system in the Kyoto Protocol allowing countries with a greenhouse gas reduction commitment to purchase carbon offsets from projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries.
Regional Greenhouse Gas Initiative (RGGI): The first mandatory, market-based cap-and-trade program for greenhouse gas reductions in the U.S. Ten states are involved: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont.
Renewable Energy Certificate (REC): A voluntary trading vehicle representing the environmental benefits associated with generating electricity from renewable energy sources. Certified by an official agency to ensure quality.
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